Mike has an interesting thing up on Atlantic about the contribution of credit cards to income inequality. It is not really debatable that credit card issuers make very little money off of the wealthy. For people with ample resources who pay their balance monthly, the only way a credit card company is making money is from an annual fee (which is a drop in the bucket to the wealthy) and merchant fees for purchases, usually 3%. There's no reason to give a rich person a credit card beyond the hope that they will buy a lot of expensive things and rack up fees at the point of sale – fees that are paid by retailers and are invisible to consumers. No, rich people with $250,000 credit limits aren't of much use. Giving a bunch of poor people a $2,000 limit and then assholing them with late fees and 28% APRs is where it's at. This is common knowledge.

What is not as widely recognized is the redistributive effect Mike points out. Exorbitant interest rates on high-risk borrowers effectively subsidize the prime interest rates paid by the more affluent (not to mention the benefits to wealthy consumers' stock portfolios when the financial industry rakes in profits). Perhaps that is why we are starting to see stories in the Wall Street Journal about how 90s-style conspicuous consumption is returning to Wall Street – albeit a bit more quietly than before, lest the people who provided the bailout/handout six months ago take offense – alongside New York Times stories about how one in four children in America is receiving food stamps. One in four. Don't worry, though, the right wasted no time reminding us that this is merely evidence of how food stamps are too easy to get.

Yes, our financial industry does a hell of a job of extracting money from plebeians and passing it up the food chain to their social betters. It's not limited to banks and credit card companies, of course. Here in Georgia we have a particularly egregious legislative "fuck you" to the poor called the HOPE Scholarship program. It essentially provides any Georgia high school student who graduates with a 3.0 (which, if I recall high school correctly, is real hard to get) with four years of free tuition at state universities. It is contingent upon maintaining a 3.0 in college, but the vast majority of students I see are paying no tuition. So where does the money come from? A Harvard-sized endowment? Hardly. A generous state legislature? Perish the thought. No, it comes from Lotto tickets.

I'm sure there are some legitimately poor students for whom the HOPE program is the determinative factor in going to college. Overall, though, the program sends a phenomenal number of white kids from the suburbs and from middle- to upper-middle class households to college on the backs of people buying Lotto tickets. In other words, on the backs or poor people, including a disproportionate number of black people, with little to no formal education. Yes, in Georgia as in every other state the vast majority of Lotto sales – thanks in no small part to aggressive targeted marketing – are among low income minority consumers. What is ostensibly a magnanimous scholarship program is a weakly disguised plan to suck money from the poor and give it to suburbanites by paying for Billy's four years at Tech. You have to admire the sheer amount of balls required to propose such a scheme let alone to pass it.

It will be nice if the broader discussion about credit and debt addresses income inequality. What would be really nice, however, would be a passing nod in recognition of the structural and institutional causes of inequality rather than a simple descent into a patronizing moral argument about personal responsibility and meritocracy. These people get screwed because our social, financial, and political institutions are carefully designed to screw them. It's all remarkably effective.

This entry was posted on Tuesday, December 1st, 2009 at 1:04 am and is filed under Rants.
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21 Responses to “THE GIANT SUCKING SOUND”

I may be a total financial dunce, but credit cards (/and/ lotto tickets, for that matter) have always seemed a waste of money. People keep telling me having a credit card is a good idea but it's never set right in my mind. Thanks for this extremely well-written support for my stubbornness!

JC Penney's (and no doubt many others) also charge late fees when the bill has not been received and opened by its due date, not simply postmarked. Or try to. I've bullied my way out of that scam twice.

You know, this is one thing where Conservatives and Liberals ought to be step-in-step.

Seriously, listen to Dave Ramsey one afternoon, and you hear him say, in all his Red-State COnservative glory, in between defending the Bush Administration and tax cuts, he says, CUT UP YOUR CREDIT CARDS. PAY CASH, and LEARN TO LIVE WITHOUT.

Which is the same thing my Republican mother says – when she was little, there was no such thing as a credit card or unsecured loan. She was actually shocked I got my first Credit Card in college, sold to me by a classmate — she wanted to sue his parents!

And the lottery is as bad as the 2008 Obama campaign — it gives us hope, take our hope, and say, wait for it… you gotta work to earn something, and in the meantime, act like you lost the election and owe the losers a ransom.

I don't have much of a problem with the lottery or with credit cards, but I hate the consumer in general. Poor people are desperate and get screwed all the time, but it's the poor people who pretend to be wealthy that are the ones that are getting hurt the most (and the ones that the credit cards and banks get their profit from.) The pride of consumers is what props up those business models, and as long as living within your means isn't considered morally okay when those means are not lavish, this stupidity will remain. Pride is the problem, and there's always someone ready to screw you over issues of vanity.

I've always thought of the lottery as an Idiot Tax. Which is why, when I don't win anything, I know I was an idiot and I know my money went somewhere (though I think the companies running the lotteries for the states need to be thrown to the dogs and the states should run their lotteries themselves.) Using the Idiot Tax combined with a Big Gulp Tax (where I forced myself to buy a lottery ticket with each oversized carbonated beverage) was what weaned me off soda. I don't recommend that as a governmental initiative, but it worked for me.

As for credit, yes it's been too easy to get for too long. We had a bubble economy, now it's bubbling up again, and credit cards are all too happy to give me a higher limit (my $1000 limit went to $4000 this month on my one credit card, just in time for… something, I guess.) This economy makes no sense, but I'll be getting my next loan the old fashioned way: at my credit union.

Bank fees are also subsidized by the poor. Rich people with high balances get things waived on a regular basis, but those going paycheck to paycheck better not dip below zero on those checking accounts or we'll wish we had gone to a payday lender to avoid those outrageous fees. That they sell those as a "convenience" to avoid embarrassment is an even greater travesty than anything gambling-enablers do.

Pride used to be a vice, now it's encouraged in churches, high schools, and at civic events. It's promoted by car dealers, mortgage lenders, and sports teams. And it's almost always tied in to buying something, usually not with cash, and it's usually something that will need to be upgraded later. Prosperity Gospel isn't just a religious thing in America, or even in Britain and elsewhere.

The concept of being "dissed" is the other side of this pride bullshit. All the poor have is pride, and "disrespecting" poor people is the best way to get punched in the mouth there ever was. The poor know when they're being judged (always,) hate it (as anyone would,) and lash out on occasion. Their pride is based on similar bullshit as that of the rich and the supposed middle class, but it's just as ingrained in our culture. Are poor people fooling themselves into thinking their version of pride matters? Or are the wealthier people fooling themselves into thinking their pride wasn't bought? The answer is, yes.

It's a 3% merchant fee every time that particular chunk of money is used. So if someone's charging $3,000 / month and paying in full every month, the card issuer is making $1,080 every year off those purchases. That's a 36% APR on that $3,000 in capital, not exactly chump change. Presumably some of that is eaten up by the actual cost of performing the transaction, but I doubt it's anywhere near the total. Hence the price of goods rises to cover the exorbitant profits the card companies skim off this transaction tax. But hey, we can dance through the checkout line at record speed like the ad says!

Late fees affect all cardholders, though some can better afford to pay them.

The real benefit for the better-off comes from the incentives each company offers to lure the marginal high-wealth customer to their card product over the competition. When you can't go anywhere else to obtain credit, you're stuck and vulnerable. When you can go anywhere you choose, you're essentially a no-risk means of making a bit more money for any card company that can get you signed up. So they use shiny carrots of lower interest rates and points programs to lure these folks to their cards. To keep their returns high enough to make Wall Street happy, they screw over their trapped customers as much as possible. They do the same for the marginal customer, but since the marginal customer has the means to choose another card, there's only so much screwing they can do.

Bottom line: If the credit is being used, then the credit card company / bank is making serious money. And they'll screw each and every cardholder to their personal pain threshold, and then try for a few $$ more.

I agree with you on most points Ed, but I am forced to disagree about HOPE.

You see, I went to college on HOPE. And without it, there's an excellent chance I would have been unable to afford it without massive student loan debt. As it is, I already had a modest chunk of it even with HOPE and us paying what little we could out-of-pocket, though certainly far less than it could have been. My parents were divorced, my mother worked and still does work two jobs just to get by, my father was foreclosed upon and had to take up a more-modest-than-it-already-was home — growing up in my family, a twenty dollar bill was a precious thing, and my parents got by mostly on credit.

My point is, while we were by no means poor, we weren't exactly affluent either, and were lower-middle class.

Lottery tickets most certainly *are* aggressively marketted towards poor folks. But there is nothing compelling them to buy the tickets. It is their choice. HOPE itself has been running low on funds for some time precisely *because* a good bit of the lotto business is moving out of Georgia — we used to be the central lottery hub for most of the southeast, but surrounding states are gradually getting their own local alternatives and reducing the user base for Georgia's tickets, and therefore HOPE.

But HOPE allowed me to go to college, get an education, and now a job that comfortably supports me and allows me to give a little back to my parents. I honestly can't fault that. There has been talk of making HOPE means-tested as well as merit-tested, and I can understand why… but I also understand that HOPE is a scholarship that fills the gap for people that are too poor to go to college, but too "wealthy" to receive means-tested scholarships. In truth, I feel it should be supported by a state tax rather than lottery, but as that will almost certainly never fly here in Georgia, I must accept the way it presently works as the only way it could.

Yes, indeed. Before I got into IT work, I used to live in Atlanta. I worked as a paralegal visiting guys in the state prisons and Atlanta city jails. My office was located right near MLK's tomb. I marveled at the amount of torn up lotto tickets that were scattered all over the neighborhood. It was almost as if there was an ongoing ghostly ticker tape parade that no one ever saw. I've always said that it is expensive to be poor in this country. Again, no surprise there.

It's been decades since I was in HS, and it was in a different state, but I thought a 3.0 is a B average, which isn't that hard to get, although your point still holds that those who are able to attain it are more likely to come from families with more advantages. Keeping a 3.0 in college is obviously more of a challenge.

As a current recipient of HOPE and the eldest of three kids of a middle-class family, I feel that I wouldn't have been able to go to college (or at least would have been saddled with large amounts of debt, even in-state) without HOPE. I don't know about how the scholarship is actually distributed, but that's me. Actually, HOPE has created a positive externality (depending on who you are) for some of the universities. For instance, UGA used to be pretty much the safe school for everyone. If you couldn't get your sorry ass into any other college, odds were that you could squeeze it into Athens. But now, with the influx of in-state HOPE recipients, they've been forced to raise their standards so much that even for the smart kids, admittance is no longer guaranteed. That might be a positive spill-over benefit (depending, as I said, on who you are).

John, just because HOPE helped you doesn't mean it's a good idea. College scholarships should be means tested. Otherwise, you end up subsidizing people who don't need the money. I realize that wasn't you, but it is lots of other people. Still, maintaining a 3.0 in college can't be that easy for a lot of people.

Subsidizing people who don't need the money isn't the singular concern with HOPE, I'd imagine. Another rationale for it is to keep smart Georgians in-state. Admittedly, the smartest will go where the smartest were going to go, because their interests in going to an out-of-state school (equivalent-to-HOPE scholarships, sheer superiority of the out-of-state institution) will outweigh the HOPE benefits. My guess is that the scholarships are targeted at such suburbanites for a good reason: those students are good enough not to go to the U. of Georgia, but not good enough to go just anywhere for free or to go to a remarkably superior institution. Thus, the HOPE scholarships make the U. of Georgia competitive with mid- to upper-mid level private institutions, as well as out-of-state state institutions (e.g. U. of Florida) that might offer a good scholarship, but not a good enough one to compensate for the additional out-of-state tuition fees. In other words, it helps to make the U. of Georgia something other than a safety institution for Georgians, and as its student body's academic demographic improves gradually, so will (presumably) the successes of its graduates, and from that its endowment, and from that…on down the line.

I earn somewhere on the order of $200/month in rewards points due to credit cards. I scheme the rewards points like a motha fucka. I buy a lot of equipment for work (expensible). Credit card, 1% bonus on any card. Restaurants? 5% on Discover right now; 2% on BP/Visa other times. Gas? 5% at BP; 3% elsewhere on chase card. Etc..etc…….

Plus, if I ever need to run up credit (which has happened before no thanks to our wonderous magnificent health care system), I have the advantage.

The problem is not credit cards. It's the regulation of credit cards. There needs to be limits on these late fee / increased APR nonsense; deffered interest that is immediately added back if a payment is missed; impossiblely large credit lines to people who would never be able to afford it (credit does not justify the limit); ridiculous "over the limit" charges (as if the credit card company is unable to just decline a charge that goes over the limit, instead of charging you a fee); etc.

I don't think he is criticizing the HOPE program so much as pointing out that it represents a massive and undeniable shifting of wealth from the impoverished to the less impoverished, just like credit cards. A very interesting point IMHO, especially given our government's role in such things.